Why Investor Dislike Birla’s Grasim – Aditya Birla Nuvo Merger ?

August 17, 2016

Grasim Industries Ltd has proposed to merge Aditya Birla Nuvo Ltd with itself. Shareholders of Aditya Birla Nuvo would get 3 shares of Grasim for every 10 shares they hold. Thereafter, Aditya Birla Financial Services – would be demerged and listed as a separate entity where for every 1 share held in Grasim a shareholder will get 7 shares in Aditya Birla Financial Services which would be then listed separately.

Wouldn’t it be better to first demerge Aditya Birla Financial Services from Aditya Birla Nuvo? That would be a good way to unlock value for shareholders of Aditya Birla Nuvo.

Why Investors Hate the Current Merger ?
Currently Grasim’s business is Cement (70%), pulp & fibre (21%), and chemicals (9%). The New Grasim will be holding company for financial services, telecom, cement, textiles, chemicals, and a small segment that includes insulators and solar power. Institutional Investors fear Grasim may eventually turn out to be the group’s holding company with exposure to various different businesses with the proposed merger and hence, may attract higher holding company discount especially post the listing of ABFSL. Under status quo, that is, assuming the stock continues to get valued using 35% discount to group entities that Grasim would own as holding company could imply 12‐months positive return of 14%; and if the holding company discount were to move up to 55% (similar to Aditya Birla Nuvo).

In Kumar Mangalam Birla the Chairman of Aditya Birla Group’s thinking this is a very Sweet Deal for Long Term Investors [5+ Years]. However, post amalgamation, the Birla Promoters stake in Grasim will go up from 31.28% to 39% Kumar Birla argues the rationale for getting the financial services arms (ABFSL) of ABNL under Grasim was to provide ABFSL strong parentage support / corporate balance sheet strength required / preferred by regulatory norms. He fails to provide the roadmap and vision for Grasim Post Merger, except stating business will be brisk for each of the divisions.